How vesting works for both options and growth shares.
In a nutshell, vesting is how you ‘earn’ your shares/options.
More often than not, options and growth shares come with conditions attached to them to incentivise people to stay with the company and help it grow. These conditions form the vesting schedule.
Let’s say you work at a bakery, and your boss promises you a delicious cake as a reward for your hard work. However, they don't give you the entire cake upfront.
Instead, they give you a vesting (or baking?) schedule where you receive one slice of cake every month for a year, as long as you continue working for the bakery.
Each month that you work, you "vest" – or earn – one slice of cake, gradually building up your ownership of the whole cake that was initially promised.
Vesting schedules can be time-based like the analogy above, through performance-related milestones, or a combination of the two.
Vesting is slightly different for options and growth shares, and we’ll explain both here.
When your options vest, they are yours to keep (so long as you stay with the company), and you bank them until they become exercisable (converted into shares).
A typical vesting schedule may look like this:
- 4-year vesting period with a 12-month cliff with annual vesting thereafter
- 25% of the options vest on the cliff and each year after
What’s a cliff, you ask? It’s the period of time between the vesting start date and when the first options vest.
A cliff is used to incentivise option holders from the get-go, rather than promising they’ll be granted options in one year’s time (or however long the cliff is).
Another added bonus for cliffs – in the case of EMI – is that the Business Asset Disposal Relief (BADR) ‘clock’ begins on the grant date. As long as you hold the EMI options for at least two years from the grant date, you will only pay 10% Capital Gains Tax when you sell the shares (more on EMI tax here).
It is possible (though more uncommon) for options to be granted without a vesting schedule, in which case the options immediately vest.
However, it’s important to know that once your options have vested, they may not be immediately exercisable (the process of turning the options into real shares).
If the exercise condition is “Exit only” then you can only exercise your options when the business goes through an exit. If the exercise condition is “Exercisable” then the options can be exercised as and when they vest.
Your dashboard will outline your vesting schedule, and your agreement summary page will provide a more detailed view along with your exercise conditions.
Growth share vesting
Unlike options, growth shares are issued as shares at the point of acceptance. There’s no exercising involved, and growth share recipients become shareholders in the company immediately.
Growth shares will often have a vesting schedule attached to them to incentivise recipients to earn their equity.
Again, this vesting schedule can include time or performance-based conditions, or a combination of the two.
But unlike options where there’s another ‘step’ to becoming a shareholder, once growth shares vest, they cannot be converted into deferred shares (essentially cancelled).
For example, if someone is issued 1,000 growth shares with 25% vesting each year, they will get to keep 250 growth shares each year so long as they fulfil the conditions of their agreement.
The main difference between growth shares and options is the hurdle attached to growth shares.
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